Wednesday, November 28, 2012

We talk about taxes in terms of rates. We talk about spending in terms of levels.

There's good reason for that of course, since those are the units of the policy decisions.

But what are the implications of this way of talking about fiscal policy? It's going to bias people into thinking "spending is out of control". As a result of inflation, population growth, and economic growth, the levels of both revenue and outlays are going to be continually increasing, even if the role of government in the economy stays exactly the same. The same is true of revenues, of course. But that's the point - nobody talks about tax policy in terms of revenue levels (unless they want to just flash big numbers). They talk about it in terms of tax rates. When tax rates have stayed steady but spending levels have increased, it's very hard to make the argument that we need to raise taxes.

There's also a credibility argument to it. Spending is going to keep increasing no matter what. Any effort to balance budgets by pulling back on spending - even if it helps to reduce deficits - will always look like it has failed, since all the opposition has to do is wait a little while and let it keep creeping up.

Tax cuts have no such (apparent) credibility problem. When Congress cuts tax rates they're cut. Tax cutters look like they keep their promises, even if the government actually collects more revenue over time (for the same reasons they spend more money over time).

People are talking a lot about how Costco treats workers better than Wal-Mart and does well and that it offers a better "big box store model".

I don't know how widespread Costcos are or how many people actually shop there, but I think it's important to recognize that these are not exactly the same shopping experiences. You have to pay a big up-front fee with Costco that you don't with Wal-Mart. And it's different products. Costco let's you buy a lot in bulk. Wal-Mart has some bulk purchase aspects to it, but mostly it just has a whole bunch of cheap stuff.

We were Costco members for two years, but if you're just buying for two it's not the most cost effiective way of shopping. Ten years from now I could see us joining again.

It just makes me wonder: is Costco able to be better to its employees because its actually not as low-cost of a store, it just seems that way because it has a warehouse/wholesale-type feel to it? Everybody's been making a big deal about the differences on the side of labor costs, but there are big differences on the other side of the ledger as well.

Costco is great for salmon, sun-dried tomatoes, and beer. We got our flat-screen there too.

Scott Sumner and Josh Wojnilower link to a Glenn Reynolds post on how federal power props up the DC area economy (that's tricky to nail down in and of itself, which is important to realize - to a large extent this means most people south of Baltimore, north of Richmond, west of Annapolis, and east of West Virginia - that whole area is on the same growth trajectory).

To a certain extent this is clearly true. But I'd push back a little on this. Certainly the federal government got the ball rolling on growth in the area (it was a swamp before they came in, after all), but the bigger point is that the federal government makes the region more stable/less cyclical. That is obviously really nice. But take it from someone who pays a mortgage with a federal salary: the federal government is not a growth industry right now. I haven't talked about it on here because I've never been in the mood to read comments about how it would be better if a bunch of federal employees were shown the door, but we have real concerns about whether Kate's employing agency will even exist if sequestration goes through (to say nothing about the pay freeze that's been in place for a couple years now). The graph below (indexed to the peak of the cycle - spike is obviously Census) illustrates the point. The federal government is stable to be sure, but not some kind of robust contributor to the region right now except insofar as we're talking about its acyclicality.

The article mentions Tysons, which is a mess to drive through right now from construction.

That is not the result of the federal government's power.

So what is it?

Self-sustaining growth to a large extent. There's a lot of tech firms and medical research in this region, and it's also just an up and coming population hub that's nice to live in. Why is that the case? Certainly the feds had a role. Tech firms got into this position of self-sustaining growth because defense contractors moved in over the last fifty years. The health sector got into this position of self-sustaining growth because NIH was here. That's all true - I'm not trying to deny the role of the federal government. I'm just pointing out that although it's due to a federal spark, the growth in this region is self-sustaining. Could it survive if the federal government vanished tomorrow? Of course not. New York City would be in trouble if Wall Street vanished tomorrow too, though. It's part of the ecosystem - just tearing it out would be a big problem. But there's clearly more to New York City's economic vibrancy than Wall Street.

One other point: in a balance-sheet recession where one of the most important items on the balance sheets in question are homes, a little acyclicality in the housing market can go a long way toward paving the way towards steady recovery. In other words, it may not be so much that federal power is propping us up as it is that the federal government's presence prevented the sort of balance sheet problems for Washington area households that could have kept us mired in continuously depressed labor markets. It's not the federal power is growing - it's that it did not shrink at a very critical time for area households.

I am busy with a paper today but I wanted to highlight a couple more posts from Gene on monkey brains and objective truth:

1. This one (I have issues with how he characterize my argument here, which I note in the comments. Then I have issues with how he characterized my comment, which I also note in the comments - once it's through moderation).

Tuesday, November 27, 2012

Specifically, he makes his way in the world using "a set of heuristic guesses made by a jumped-up monkey with a set of brain circuits designed to detect whether the fruit is ripe or it is safe to jump to the next branch".

And of course, that's true of all of us.

I do not know Nagel, so I will not jump into that particular fight with Gene Callahan. But speaking of monkey brains specifically, Gene trots out the tired old "if it's just a heuristic guess or convenient fiction then you can't prove the claim - you're just guessing about the fact that you're guessing!".

Right. That's the point.

And you're just guessing too. The thing is, Brad and I know we're guessing.

The metric is not whether we have plumbed the depths of objective reality. That sounds like a good metric on paper, but it's not a metric that we have access to. Instead of criticizing Brad on the basis of a metric that neither Gene nor Brad have available to them, perhaps we should come up with a different metric. Something like "does this heuristic seem to help me navigate the world".

That doesn't pose the same sort of problems as the metric of consistency with objective truth. We may argue about it, but I don't see what's wrong with that. Gene and I may never agree about the claims that best help us navigate the world, but I Gene and I can both have more confidence in the sentence "this claim helps me navigate the world" than the sentence "this claim is consistent with objective truth".

That seems pretty good to me.

And it turns out that even though we have to accept a degree of pluralism and disagreement when we abandon "objective truth", we still seem to generate a fair amount of agreement. It's not hopelessly disordered. There seems to be enough consistency in peoples' subjective experience that we can generate a set of claims that a lot of people agree with.

What more could you ask for? That's pretty good for a monkey, right?

UPDATE: Nagel's way of thinking, of course, is itself a heuristic that does a decent job helping people navigate their world. It staves off existential anxieties, explains the order we see, reinforces social institutions, along with all sorts of other benefits. That's why it endures. That's even why it's worth talking that way sometimes. But that doesn't mean it is "true" in the "objective truth" sense of the word "true".

Slightly old news, but I just came across it. From an interview by Nick Shultz: "We are now working with the University of Chicago Press to launch a new journal, Man and the Economy. We chose our title carefully to signal the mission of the new journal, which is to restore economics to a study of man as he is and of the economy as it actually exists."

I look forward to the project. However, this way of putting it always bothers me. Why the hell do they think we all got interested in economics in the first place? Because it was "a study of man as he is" and "of the economy as it actually is"!

This sort of critique gets tired, IMO. Pretty much every economist makes this claim for their work in one way or another. I am restoring economics to a study of human social behavior as it actually is! Those people over there are just playing with unrealistic models! I'm getting to the real thing!

Seriously - can you think of a single economist that doesn't raise this banner over their work? Name me one that doesn't genuinely think this is what they are doing. Maybe the economics equivalent of the machine tool industry (econometricians, etc.) - but even they're building those tools in service of people who are "restoring economics to the study of man as he is".

I don't take Coase too seriously (yikes... that was agonizing to write) when I read this. I've read similar statements too many times before. Everyone thinks this.

I read this statement as saying "Human society is complex and multifaceted. It's hard to take into account everything you'd want to take into account. There are some things I wish people would focus on more and some things I wish they'd focus on less. I'm starting a journal that's going to feature things I wish they'd talk about more and it will reject papers about 'man as he is' that happen to focus on things that I don't want to focus on".

That is not as dramatic, but it's still intriguing. After all, Coase is brilliant. This mission statement would suffice for me. I'd love to get better acquainted with things that Coase thinks are important to focus on. He certainly hasn't disappointed in the past.

As for "restoring economics"... meh.

Self-appointed restorationists ought to be taken with a grain of salt, even if they're Ronald Coase.

As I've pointed out before, it is very hard to make a profit-maximizing case for anything outside of low Earth orbit (although there are lots of profit maximizing opportunities there). Tim Worstall goes through the sad truth about asteroid mining. Getting access to those sorts of deposits could revolutionize life - it's not that the treasure trove isn't an enticing prize. But it's unclear whether it's a viable business plan:

"Start from the size of the platinum market. This is some 6.2 million ounces a year. 6.5 million ounces of virgin material, that is: given the value of the metal some to all of past usage is recycled as well. At our $2,000 an ounce price guide, that gives us a market value of some $13bn a year. That certainly seems large enough to keep a space programme running. (Do note, I'm ignoring palladium, a similar sized market, and rhodium etc, which are much smaller ones. They don't change the final conclusion by their inclusion or exclusion.)
Except that's not quite how markets work. There are demand curves as well as supply ones: sure, a nice high price will encourage new entrants like Planetary into the market. But in order to shift all this new material, prices will have to decline. The important question therefore is how elastic is the market? How far, if at all, will the price fall if a new supplier enters?
From a recent trade report we've seen recently, an extra 250,000 ounces has come onto the market. This has led to a 25 per cent fall in the price of platinum. Ah! Price is very sensitive to an increase in supply, then. Or, if you prefer, demand is very insensitive to a change in price. They're the same statement, really.
Now it's true that such sensitivities do not stay the same as you move up or down a supply or demand curve. As our little economics lesson for the day, think about the demand for water: if you're getting less than one litre a day you'll pay just about anything at all to get more. When you can have a swimming pool full just by turning on the tap then you'll not pay much for each marginal unit. And such demand curves can invert too: when that pool overflows into the basement you'll happily pay to have the water taken away, a negative demand for water.

But back to PGMs. We have something that we know the demand for, in the short term at least, is relatively insensitive to price. An increase in supply of as little as 250,000 ounces - seven metric tons - will drive the price down by a quarter. So instead of the $500m they were hoping for, our lads would only (yes, I know, “only”) get $375m. Can we run a space programme on that? The more platinum they try to bring down from space the lower the price gets, and so even more has to be brought down to finance the whole shebang."

So are we doomed to be Earth-bound until we're so technologically advanced and gasping for clean air and new resources on a crowded, hot planet that it makes sense to venture into space?

No - we just need something other than the profit-motive to get us there. Not everything is done with profits in mind. Quite a bit of what gets done is done by non-profits after all, and then of course there is the government. Arguably, even "profit-maximizing" firms have goals other than profit-maximization. People do benefit from space exploration, the problem is those people are not alive today and they do not have equity stakes in aerospace companies. They're people like the human residents of Mars in 2512 or the human residents of what we now call "exoplanets" in 4012.

I think it's fair to say that Hayek's model is "frictionless", although that's not the stand-out feature. Hayek very much offers a real version of the business cycle. It's a "real business cycle" caused by monetary non-neutrality of course - and that is different. But most importantly, unlike Friedman, Lucas, Prescott (and a variety of others) returned to more Hayekian themes on the capacity of government to deal with the business cycle.

They're not Hayek of course. You can obviously find differences because they're different people! But within the mainstream, I think if you had to identify a re-emergence of Hayek it would be in these sorts of guys and these sorts of ideas.

2. I am reading mixed things on whether Medicare funding of residencies or the residency review boards themselves are clogging up medical labor markets - particularly specialties. The latter makes a little more sense to me. Medicine is a lucrative field. If the governments' entitlement program can't bring itself to fund all the positions that need to be funded, I can't imagine the funding can't come from elsewhere. My brother is engaged in a PhD program in theology due to the generosity of University of Chicago undergrads. Surely schools benefit enough from their hospitals relative to the benefit that the University of Chicago receives from its theologians that most could manage the same for medical students if they had to. My guess is the blockage is elsewhere, although there could certainly be problems with institutional evolution on this front.

"In all cases man must eventually lower, or at least shift, his conceit of attainable felicity; not placing it anywhere in the intellect or the fancy; but in the wife, the heart, the bed, the table, the saddle, the fire-side, the country."

Sunday, November 25, 2012

A very thoughtful review of Wapshott's book by Noah Smith includes this and other analogies to the modern blogosphere. I think that's good. I've never quite been comfortable with the take on Cowen as an impartial judge. He does have a clear viewpoint, and yet there is an air of impartiality about him. Noah nails it - Cowen is Pigou!

I don't know what to think, but this sort of talk makes me uneasy. Why shouldn't the increased demand bid up health worker wages? Why shouldn't that draw new people into the field? One reason why is the AMA, which puts constraints on this market that I wish I understood better. But this still seems like an odd worry to have from the get-go. I feel like I need to have a good reason before I get worried about this. Health care is a well-paying, well-respected profession. If it had stagnant wages and reputation I might look to the increased demand from health reform with more concerns.

I told myself that I would use the Shapley/Roth Nobel as an opportunity to learn more about the health workforce, after being exhorted to by Brad himself. I did do a medium-thorough skimming of several of Roth's articles but then other obligations butted in. Maybe this winter break - it is an important issue. Does anybody know about a good book on this labor market?

- The first is one I discussed with my psychology PhD student sister-in-law and her psychology PhD student fiance over the holiday (they have a lot of the same publication bias issues in that field). They seemed intrigued. The idea is that you submit articles before your results are in and have them provisionally accepted for publication. So you have your motivating discussion, any lit review, your description of the data and the methodological set up, and any descriptive statistics. You might even have an initial conclusions section that discusses what to make of the results depending on which way they go. This gets refereed and provisionally accepted. Then you run the results and submit the final paper. Of course if there are any major problems with execution the journal could reject it, but you could have the journal publish all completed papers online that they rescinded their acceptance for for publication in the journal. This should, I imagine, cut down a lot on the publication bias in empirical results, and publishing the rescinded acceptances online would keep that from being abused.

- The second one was inspired just now by this post on Stumbling and Mumbling (HT - Gavin Kennedy), which discusses the extent to which economists are isolated from "real life" as Coase claims. To a certain extent this may be true, but I think it's one of those over-hyped criticisms that people that like to be critics of the mainstream like to make off the cuff without much real evidence. As the post points out, there's a lot of very useful stuff in economics for "real life" that many in "real life" also use. The recent Nobel Prize winners are an excellent example. You can think of giants in the field like Gary Becker that are acclaimed precisely because they pay attention to "real life". Anyway, so I think it's an overstated criticism but there's obviously something there too.

A solution would be to increase the extent to which economists did field work and interviews. I never really saw this problem at the Urban Institute, for example, because field work - or what was often referred to there as "qualitative research" - was a major part of the research program. The people that gave you estimates of disincentive effects of welfare programs actually went out and talked to welfare recipients or administrators, and they were surrounded by and always talking to people who did the same. It was impossible to get the thoughtless libertarian/conservative line that only speaks about welfare in terms of the disincentive effets or the thoughtless progressive approach that assumes away the disincentive effects because you're actually there seeing it in action (and then, of course, going back and working with the data as well). It's helpful working with Hal Salzman on my science and engineering workforce stuff too because he - as a sociologist - does a lot of his work in teh field. It's a nice balance with the data work that I do. Obviously this would be tough to push out to the discipline. It would require changing the way a lot of economists think about the science and it might require more money. But it would be a good change.

Synopsis: markets work. When you hear employers especially complaining about skills shortages, it means they want policies to get the same workforce for less money. I'm very glad to see someone like Krugman not get caught up in this shortages nonsense.

I don't know. We thought we might have before, and it disappointed (although some suggest we did find life before - the evidence is clearly too sketchy to get excited either way).

But in case you didn't hear, NASA's Curiosity had a big find that NASA is keeping secret as it tests and retests the data. They don't seem interested in managing expectations at all, announcing that "this data is gonna be for the history books". That's quite a statement, isn't it? More conservative guesses are that it's organic material in the soil. I found this passage from that article interesting:

"Whatever Curiosity has found, it is not evidence for life on Mars. It can't be. Curiosity is not designed to look for life. Grotzinger has stated this himself. In a NASA video about the mission, he says, "Curiosity is not a life detection mission. We're not actually looking for life; we don't have the ability to detect life if it was there."

What if they brushed dirt off a small fossil? What if a little bug crawled across the screen and Curiosity followed it back to a Martian ant hill? Or lichen on a rock? "Not designed to look for life"? What an unimaginative way of thinking about things. They mean, of course, that it isn't equipped to identify microbial life in soil. But Mars is a big planet, and even if most of it is blighted and uninhabitable that doesn't mean Curiosity couldn't have stumbled on something previous probes missed.

Of course, it probably isn't life. It probably found the sorts of things it was sent to find. That's where the smart money is. But "for the history books" is an intriguing turn of phrase, and I'll be waiting expectantly until they announce exactly what we've got here.

So what do you think:

1. Will we hear in a couple weeks that there is life on Mars right now?
2. How will that change the way people thinking about their place in the universe?

From Bob Murphy: "Austrian economists are the analog of the “Intelligent Design” scholars"

I actually wouldn't go that far, but I feel it's important to share the considered thoughts of those who would disagree with me on that. I do think Bob put the quotations marks in the wrong place - it should be Intelligent Design "scholars". And that's the real problem - they use bad reasoning to prop up an unscientific idea long after most serious people who used to hold that idea gave it up. This is very unfair to compare to Austrians. Austrians aren't all that bad. They make a lot of hay out of processes that are probably of secondary importance, but they're not unscientific about it... except for when they are (for example - the way some Austrians scoff at theoretical modeling or empirical work). But that's a minority within the community of Austrians. If Bob just meant Austrians were a minority view, that would be true but it seems to me there are much nicer ways of saying that than referencing Intelligent Design "scholars".

Thursday, November 22, 2012

I have noted on past Thanksgiving that actually the first Thanksgiving was in Virginia, not Massachusetts

Also in that vein, we can note that according to the National Historical Geographic Information System, Massachusetts wasn't even able to produce a full Thanksgiving meal for every resident in 1900 (Northern Virginia was, although the part of Virginia where the first Thanksgiving was held was not either)! Thankfully, the propensity to truck, barter, and exchange can solve this.

Thanksgiving Meal Self-Sufficiency Index* - 1900 Census

Data on turkey, sweet potato & cranberry production at county level from NHGIS

Cocoa, bourbon, and coffee. It tastes like a bourbon ball - one of my favorite holiday treats.

We have had Kate's twin sister and her fiance, Alex, here all week from Alabama (Auburn University, some of you will be interested in knowing... not economics), and we're going over to the ladies' dad's house tonight for Thanksgiving.

Happy Thanksgiving everyone!

And if you're not shopping tomorrow and need something to do, go see Lincoln. I saw it yesterday with Alex and it's an excellent movie. The trailer is below. What's interesting is that it's all about getting the 13th amendment passed, but the trailer really doesn't give you a sense of the conflict involved in that effort at all. It's all about tugging between House Democrats, conservative Republicans, radical Republicans, and the Lincoln administration but you don't pick up on any of that conflict in the trailer, which makes it look like a war movie (except for a couple scenes, it's not).

Surprisingly funny too - Lincoln is one of the funniest characters, as is James Spader's character. That brings me to another thing: it was a great cast. I imagine when Spielberg comes to you and asks if you want to do a movie about Lincoln you don't get many "nos". This is one of those movies where after watching it you're going to have a hard time thinking about Lincoln as being anyone other than Daniel Day-Lewis (just like the guy they cast for the brief appearance of Lee was all wrong simply because he was not Robert Duvall).

OK, this morphed from a coffee post, to a Thanksgiving post, to a Lincoln post. I'll let you see the trailer now.

Jonathan takes the features that discussed which prove that Keynesians have consumption in models and have some thoughts about it to be a segue into thinking that it's a consumption-driven theory. Again, I disagree. If having consumption in the model and mentioning it opens the door to being a consumption theory, then every economist is a consumptionist. Austrians assume a trade-off between consumption and investment, after all! That seems to give it a much more prominent role than Keynesians do. After all, Keynesians assume a lock-step trade-off between consumption shares and saving shares, but that's simply because it's an accounting identity (S=Y-C)! Austrians have to actually assume the same sort of trade-off between investment levels and consumption levels - there's nothing in nature requiring such a thing. So if the mere relevance of consumption to the machinery of the model qualifies here, then there are other more prominent candidates for being a consumptionist theory. Now, I don't want to disavow the way Keynesians talk about it at all. I don't think there's anything wrong with emphasizing consumption if that's what you want to emphasize. So I'm not interested in tossing this back at Austrians, I'm just interested in keeping the mere presence of consumption in the mechanics of the theory distinct from the misleading tendency to think about Keynesianism as a consumptionist theory - because that leads people away from very important discussions about capital, money, the loan market, etc.

Bob's post is a little odd. First he invokes the paradox of thrift and the marginal propensity to consume, but he seems to be making the same mistake I mentioned when I brought them up. Yes, we talk about the marginal propensity to consume because it impacts the multiplier. But shifts in that aren't what we think causes downturns (which I gather is what Gene was curious about). By mentioning mpc all you're doing, Bob, is noting that consumption is in our models. But... isn't that true of all economists?

He has an unusual use of the paradox of thrift to make his point to. As I said before - increasing saving relative to consumption is no problem. That won't cause a paradox of thrift. What's a problem is if you increase saving relative to investment. If the share of income you save increases, the consumption share declines, and investment increases you're fine. If the share of income you save increases, the consumption share declines, and investment doesn't change you're in trouble. So it should be pretty clear it's not consumption that matters even in the paradox of thrift. (Just a gentle remark, Bob!).

Bob actually helps me make this point when he quotes Krugman: "Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income."

"Spending" of course, is not just consumption. And the fact that in the next passage he talks about the Federal Reserve lowering interest rates tells you exactly what non-consumption spending he has in mind (there aren't many other options here!).

Now, if the damning evidence is that Keynesians will write an article about consumption during a recession - particularly one where consumption takes a bigger hit than normal, I'm not sure what to say. Isn't that what all responsible recession watchers do? In fact by pointing out how unusual a drop in consumption like that is, Krugman is basically saying "this is not usually what comes up during recessions, but since it's in the data let's walk through it". After all, investment shifts because of revisions of assessments of the marginal efficiency of capital due to some shock. Certainly there's nothing that prevents consumption from shifting for the exact same reason! We don't usually talk about it because it doesn't usually happen in the way that investment (a very forward-looking activity) does. But if it happens, we certainly have the theoretical machinery to talk about it, so why not?

Take a look at Bob's title too - how weird is that? One article on consumption by Krugman shows that consumption is more important than investment? Odd.

Wednesday, November 21, 2012

This came up in a couple places but a comment by Unlearningecon offers an opportunity to focus in on it. He writes:

"Reserves are just another cost decision, along with staff, other inputs, etc. The availability of them does not enter into a bank's lending decisions, which is done purely on a bookkeeping basis. At the end of some time period, a bank will settle its reserve decisions, as with any other cost. The price of reserves can be altered to make banks lend less/increase the interest rates, but this is only in a similar way that some other 'supply shock' might."

I think some of this is good and some of this isn't. If by "endogenous money" you just mean "loans create deposits", that's certainly correct [supply and demand simultaneously determine equilibrium so I'd add "deposits create loans" too, but no need to get into that because I don't challenge the "loans create deposits" point].

But a lot of people mean a lot more than that. A lot of people mean that the level of reserves is endogenous to the rest of the banking system - that it's just a residual that pops out of the loan and deposit creation decisions, given an interest rate decision by the central bank.

This point - that the banking system generates a particular level of reserves - is what I challenge. The central bank does exogenously create and destroy reserves every day. This is the exogenous policy lever.

Another point of clarification: if you think "endogenous money" means that the central bank targets interst rates, that's fine but I don't think anyone disagrees with that point. My point is, they don't "set" an interest rate and then reserves become whatever level is consistent with that interst rate and the decisions of the banking system. No - the central bank has an interest rate target they are interested in, and then they "set" reserves by buying and selling bonds (or through other institutions in other countries) so that the interest rate they want falls out the other end.

It doesn't have to work this way, of course. This is all based on institutional set ups. You could have the causality running from interest rates, through the banking system, to reserves if you wanted. That would be a discount window approach. An interest rate is set and the Fed takes all comers. Base money is endogenous. We used to do that. But now we primarily work through open market operations and causality runs the other way. Reserves get shuffled and a desired interest rate pops out the other end.

When most Fed policy starts taking place at the discount window again rather than the open market desk, we can talk about the strong version of endogenous money again (i.e. - not the weaker "loans create deposits" version that I think is fairly non-controversial when we get down to it).

Gene writes: "So, I'm teaching Keynesian economics for the second time. And once again, I'm telling my students that, per Keynesians, recessions occur when intended investment falls short of savings. And the best way to fix this, per Keynesians, is for the government to invest in roads, bridges, parks, education, etc.
I'm fine with explaining all that. What I can't figure out how to explain is why there are people saying Keynesianism is all about consumption and takes no account of investment."

The idea that it "takes no account of investment" is very tough to justify - and probably can't be justified. But I can see why consumption might get into the mix.

First, Keynes is often taught without regard to government at all, so in the Keynesian cross you have investment and consumption with a standard consumption function. So without government in this, how would you talk about prospects for recovery?

Either investment could increase or autonomous consumption could increase. Those are both curve-shifters, after all. In practice a lot of government spending looks like consumption, right? Some is investment, but a lot is handing out money to people who will spend it: outsourcing consumption to taxpayers. That's not "the problem" from the Keynesian perspective, but it creeps into the solution.

Also, the level of consumption is reduced (along with the level of savings), when income declines. That's a symptom, though - not a cause.

The other thing is the multiplier - higher propensity to consume makes stimulus more effective. That's of course a result of the slope of the consumption schedule, not because consumption is the primary issue. But consumption also creeps into the discussion that way.

Finally, really, really bad treatments of the paradox of thrift get people to say things like "Keynes didn't like savings". Gene and other reasonable people know that the problem with this is that it ignores the distinction between any savings and an excess of savings over investment. But if you persuaded yourself to be mislead on this point, "Keynes likes consumption" is the obvious corrolary to "Keynes does not like saving".

The last two points - about the marginal propensity to consume and about the paradox of thrift - are out an out misunderstandings of Keynes leading to preoccupation with consumption. The first two points - about thinking of government spending as an increase in autonomous consumption or noting the decline in consumption - are not quite as bad but they do seem to confuse cause and effect.

The most recent immigrant in my line came from Thuringia, in east central Germany, in the 1890s. They weren't particularly well off. The patriarch left first to escape conscription.
He sent for his wife and kids but then decided a younger woman offered greener pastures. So when my great-great-grandmother arrived she was a single mother that didn't speak much (any?) English. That works out even less well in the late nineteenth century than it does today, so she wisely married another German immigrant (named Kuehn - I know a lot less about his origins). The Kuehns spoke progressively more English and got progressively better education, and it all worked out alright. They eventually married into a family that's been here almost four centuries (but who were no better off when they first arrived). They were always on the run from bad circumstances. The Joys running from English persecution in England. The Comeaus running from English occupation in Canada. The Luthers running from conscription in Germany. A couple branches were running from rotting potatoes. As far as I know nobody came here and contributed to American GDP by establishing a tech company (steam boats, railroads - you know). They came here and were poor and uneducated until eventually they weren't poor and uneducated.

For one thing none of them came through Ellis Island. They also were all here by 1903 which was when the plaque was added.

I worry about the discussion about immigration today. There's always tension with new immigrants who don't act like us, of course. So long as it's just "tension" and not outright hate I don't worry about this too much because although it's misguided, it's a natural reaction to new things.

But you'd hope that more liberally minded public intellectuals and even policymakers would construct a narrative (what Rorty talks about as "imagining" a new "social hope") about why we want the huddled masses.

Andrew Sullivan reports that this sentiment is not particularly common anymore. Quoting Don Hopkins: "In the corresponding paper, we show that it’s not just Democrats and Republicans who agree: it’s liberals and conservatives, those with and without higher education, the wealthy and the poor, those who report biases against other racial or ethnic groups and those who do not. When it comes to the question of the types of immigrants to be admitted, there is a hidden American immigration consensus, one that crosses party lines. From these results, it seems clear that Americans would be likely to support a more skill-based immigration system, such as the one employed at the federal level in Canada."

If you haven't had enough of the debt debates and if you want Bob's OLG model in words rather than in a nice understandable table, and if you want commentary from people who (seem to, to me) have a weaker grasp of what Krugman was saying than Bob, click through the links.

One virtue of Kling's post is that it details how one particular distributional nightmare associated with inflationary finance could play out. But as usual, the Krugmania is driving the narrative.

Tuesday, November 20, 2012

Monday, November 19, 2012

I think the whole idea of endogenous money is vastly overrated and the idea of exogenous money is vastly underrated.

Granted, the term is (intentionally, I think) vague. That's why I say "under-" and "over-rated" rather than "right" and "wrong". We've had some readings on it which I've only semi-attended to, and after a whole class discussing it today I am not very impressed by the whole debate.

If you want to say central banks care about interest rates, I'm fine with that. If you want to say that interest rates impact aggregate demand and that influences the broader definitions of the money supply, I'm fine with that. But monetary policy is still done by buying and selling high powered money (as far as I know - I've never talked to someone at the OMO desk), and it's done that way because while causality could run both ways (think of the old use of the discount window or Bagehot's dictums as an example of interest rates "causing" money creation), that's not how it works. Of course there is some target interest rate in mind (and THAT is only what gets churned out of some target inflation rate) - but you buy and sell stuff at the OMO desk because it causes that target interest rate to come to fruition.

Sunday, November 18, 2012

There's a lot of talk going around about how the fiscal cliff isn't really a cliff - it's a gradual slope. I'm sure that's reassuring to some people. What I find interesting is that that claim has an implicit assumption about rational expectations in it, and it's actually a pretty simplistic claim that caused quite a ruckus among economists several decades back.

And it's not just a mean freshwater assumption. It's the assumption that liberal economists used to complain about Bush's tax rebates.

So what do we conclude from this slope vs. cliff claim? Are all the people claiming that the reality is a "fiscal slope" naive when it comes to expetations? Or do they have intuitive insight into an issue that for macroeconomists has just been full of sound and fury, signifying nothing?

One way to call it would be as a "policy victory" for Krugman, a "target victory" for Sumner, and a "theory victory" for both New Keynesians and monetarists (less so for Old Keynesians but they're either dead or harmless blackboard stick figures at this point).

Saturday, November 17, 2012

"With the possible exception of Ronald Reagan, there is no more revered figure in American politics than Abraham Lincoln." - The Economist, in an article on Lincoln and Obama.

It talks a lot about the movie (I'm gonna see it this week, and looking forward to it), and I know it's tough to compare anyone to Lincoln anyway, but I think they're a little hard on Obama. Anyway, I was a little surprised by that first line.

I think they both make important points, although it looks like the post Gene had about it being a theory of the error term is down... I'd disagree with that a little.

So Gene is right that it doesn't really make sense to call it a cycle theory - it's really just a random downturn theory. But that's true of Keynesians too, and Austrians for that matter. The old accelerator-oscillator is actually a "cycle", but I think most business cycle theories aren't cycle theories. Kind of an interesting wrinkle, I guess.

I do think RBC gets a bad rep in terms of their ideological content. It's precisely because they've been genuinely dedicated to explaining the data that they've (over time) incorporated the frictions and things that Ryan refers to (and as I've mentioned recently - they include more realistic microfoundations, such as including home production in labor supply decisions).

I think one of the biggest weaknesses of RBC is its reliance on calibration. It makes it very hard to assess whether the model is a good way of thinking about the underlying data generating process or whether they have just smashed a round peg into a square hole with a big hammer. Contrast this with even a naive Keynesian model that has some interesting out of sample predictions about some stylized facts, for example, at the zero lower bound - I am much more convinced by that than by repeated ex post calibration. When those naive Keynesian predictions are reaffirmed in New Keynesian models that incorporate all the (in Ryan's words "shitty") microfoundations that an RBC has to offer, I wonder even more what RBC adds.

The point that RBC is just a theory of the error term is both right and wrong. It's wrong no a theoretical level. A shock and a random error are really two different things, I think. But on an empirical level Gene has a point. It's one thing to theorize about how real shocks or technological shocks will impact the economy. It's another thing to not have an actual variable to measure that shock and just assume any perturbaitons are precisely that sort of shock.

This gets into the application of RBC to real life as well. As many have pointed out: exactly what technological shock occurred to throw millions of people out of work in the last five years? It's hard to take that seriously. We have, after all, a massive, obvious, front-page news story demand shock. Why mess with RBC, then?

Friday, November 16, 2012

Sounds good to me. Education is a state thing by tradition, not constitutional restraints (I know a lot of you like to pretend that appropriating money for the general welfare is just meaningless pillow talk, but it really is the law of the land - I promise).

Still, although it's "just tradition" sometimes traditions are there for a reason. We have had major federal investments in higher education in the past that continue to pay dividends. It was a land grant back then, but why not another major federal grant to the states, not for existing schools but for new schools? What that would offer, of course, is decentralization of control.

We do four year colleges pretty well. What we are weaker in is mid-level skills. So why not a large federal infusion for community colleges and two year degrees. Or even better: federal high schools. One of the big problems with American high schools is that they are reliant on local tax bases. Even in the most egalitarian cases, they're still reliant on state-wide tax bases and income at the state level still varies considerably. It might be more worthwhile to scatter federal high schools across particularly poorly served areas of the country than it would be to create federal universities.

So I have to pay car insurance this week, which I knew about. But they send these automated reminder calls to your phone. On the bill you have two options: pay the whole thing, or make a payment every couple of months. And of course the total of the separate payments is somewhat higher than paying it all at once. Pretty straightforward, and it's for the cash constrained people that don't have the cash to pay it all at once.

That's not the trick.

What I found interesting is that the automated message never even mentioned the total lump sum payment option. They only mentioned the installments.

I wonder what percentage of their customers got the bill a month or two ago, forgot about it and the payment options, got the call before it came due and rushed to pay the higher price because it was the only one mentioned. It's minor, but if the only difference is a slightly adjusted automated message I guess it's an easy way to make more money.

P.S. Huff has good thoughts here. He makes a point that I agree with that ultimately any decision to go to war to stop secession is going to be part prudential, and that of course will depend on the circumstances. I agree. Some people in the earlier post have posed this as a "moral" question. To the extent that we're talking about the use of force, of course it is. But the moral question has little to do with secession. There's nothing immoral about secession (as far as I can figure there's nothing inherently immoral about treason or unconstitutional action either... although obviously an action could be both immoral and treasonous). This is just to say that the objection is political and ultimately practical. People have talked about it being a "legal" question too, but that to me is just another way of saying it's a political and practical question.

So yes - a great point. I just wanted to push the discussion a little farther than laughing at people promoting this pipe dream to thinking about what an appropriate reaction would be. My reaction is decidedly utilitarian because I've never really been put through this. If this were to actually happen, I might say "F*$& it - let them go". I don't know.

What I do find entertaining is a lot of libertarians and anarcho-capitalists who always talk a big Lysander Spooner game when it comes to the state in the union suddenly don't have a problem with states declaring secession and imposing that on all their citizens.

Finally, I agree with P.S. Huff that discussions like this are healthy. It's also nice to discuss seriously to get peoples' minds past just thinking about the Southern Confederacy. I've said before that I think the trend is going to be towards federalized, global government. But on the way to that end state it's entirely plausible that we'll see realignments and such. So it's important to think through this.

UPDATE: More from P.S. Huff!! I apparently committ "old fallacies"! He's a little vague, but I think my "old fallacy" is that I don't repeat grade school (and I mean the low grades - I'm sure by high school we were talking about it differently) gauzy feel-good history. Somehow that doesn't feel like a "fallacy" to me. George Washington and Thomas Jefferson were traitors to the British crown. Thank God they were. If it weren't 8 in the morning I'd propose a toast to treason right now.

*****

Jonathan also has thoughts. He writes: "Treason can exist in many forms, and secession ought not be one of them. At least, if we define secession as an act of treason, therefore implying that seceding American colonists committed treason against Great Britain, we should admit that defining secession as treason is not a good argument against it." Right. The revolutionaries were most definitely committing treason. I don't think there's any question about that. And I can't really blame Britain for responding how they did. Granted, there are differences in circumstance (some of which I highlighted a couple days ago):

1. We could plausibly pull it off
2. Unlike the Southern Confederacy, it wasn't a dumb idea, and also
3. It was a justifiable response to British abuses in a way that I'm hesitant to say for the Southern Confederacy or secessionists today. Secessionists today are treated as full citizens. This wasn't true of the colonists.

Granted, it was still treason. I don't think treason has any necessary moral content to it, but it does structure how political institutions respond. Britain could have quite reasonably said "yes they're committing treason but it is expensive to maintain this colony and we've been leeching off them anyway so in the interests of justice we should let them go - we have never accepted them as part of our political community despite their desire to be a part of our political community, so we have no business demanding they stay". You can't have that response to modern secessionists because they have been full participants in our political community.

Thursday, November 15, 2012

Lewinsky was an entrepreneur post-scandal and got a graduate degree from the LSE. Clinton is a Rhodes Scholar, governor, and president.

Petraeus is a decorated general and a Princeton PhD. Broadwell is a West Point grad, Harvard doctoral candidate, and author.

I'm just saying - they all did pretty well. Normally we think of assortative mating in terms of relationships with commitment mechanisms so that long-term benefits can be extracted. What's interesting here is that that was not what these relationships were, and yet there's still a highly selective dimension to it.

It could just be a matter of opportunity, of course. Generally speaking, accomplished people hang around the White House and Langley. But it's also possible that this is not so much a "rational choice" as it is an evolved tendency (because if it were a rational choice you presumably wouldn't see it as much in these more tawdry affairs).

I think I would, if it were declared and didn't go through some constitutional process (i.e. - an amendment that says "the state of Texas shall no longer be governed by this Constitution"). If they just declared it and left I think I would.

It's not that I think secession is un-American. It's thoroughly American. But it's also traitorous and unconstitutional. And in this case it would be a very bad idea that would impose costs on everyone north of Mexico and south of Canada (and north of Canada, for that matter - I didn't forget you guys!). Actually it would probably impose costs on Mexico and Canada too.

The point is, it's traitorous and unconstitutional and clearly does not carry a payoff that makes it worth committing treason and violating the Constitution over. A war over it would be terrible, but I think over the very long run it would be better than letting them go.

If they actually managed to pass a constitutional amendment disolving the Union I'd think it was a dumb idea, but I would consider it legitimate.

This is worth pulling up and chewing on, I think. Brad writes in the comments:

"I think it's simply an anomaly: when we throw race, education, age, income, gender, and religion into the mix on the right-hand side, we find that we have accounted for the overwhelming bulk of political preferences. That's how Nate Silver was able to do so well in forecasting the 2008 Democratic primary.
But that doesn't work for southern whites: there is something else going on there..."

This is a fair point. Thinking about what shapes the error structure of our models is important. So let's do the same with race. Put region in the right hand side and take race out of it.

We've explained a lot of political preference. But the model doesn't work for blacks, let's say. They are more likely to vote Obama than predicted. In fact let's forget Obama. They are more likely to vote for Democrats than predicted.

I don't have data on me to compare magnitudes, but this is certainly the case regardless. That's why Brad listed it first. It has explanatory power.

And all he's saying is that the South has explanatory power. Sure.

So? What is it that that explanatory power (because it's not really an "anomaly" - it's a correlation. It's not noise - it's information) says to us?

I'm just suggesting it says a lot less salacious things than people are implying. Southerners have for centuries not liked as active or as centralized government. This is not exactly news. After Washington took his tour of New England in 1789 he took a tour of the Southern states. He complained vigorously about how Southerners didn't seem interested in getting together and collectively providing for infrastructure the way New England did. There's always been a conservative, small government streak.

That seems to me to account for the regional explanatory power. You can throw in some more about how it was not exactly a magnet for European immigrants a hundred years ago so new fangled leftist ideas didn't get ingrained in the same way.

In any case it's a twenty point spread. It has explanatory power but I think we can just say "ya - Southerners are more conservative" without alluding to any racial undertones. Because that is where a lot of people are taking it (maybe not Brad) - that this says something substantial about race relations in the South.

If we want to talk in anecdotes there is plenty that the South has to offer in terms of bad race relations. This election cycle, twitter and Facebook have served a lot up on a silver platter. But if we want to explain the twenty point spread, I think it's irresponsible and misleading to turn to that. I know a lot of white Southerners that vote Republican that are not motivated by that. Not all white Republicans are like them. But my strong suspicion is that the vast majority are. There are a lot of omitted variables feeding into regional effects. The people who claim that the racial dog whistle of the Republican party is a substantial one are, in my opinion, quite wrong and don't know much about Southerners.

I seem to remember the guy who keeps yapping about liquidity traps is the same guy who yaps a lot about the need for lots of monetary easing, and that he has made both points with respect to Japan (Sumner is talking about Japan here).

Romney did worse among white Southerners than Obama did among blacks and Hispanics, for example. I tend to think that's because Obama takes positions that blacks and Hispanics - for whatever reason - consider much better than the Romney alternative. There might be a smidgen of the "first black president" thing going on (I've got no problem with that - I find that element of the Obama presidency very appealing too), but these guys supported Democrats back when they were white as well. So I'm assuming it's mostly Obama's positions that they find attractive.

I would think these same principles would apply to white Southerners (who - let's repeat - were less enthused about Romney than blacks or Hispanics were about Obama). Southerners tend to be more conservative and more religious than other whites... and they tend to vote more Republican than other whites.

So?

Isn't that... kind of obvious.

No single post inspired this - just one or two I saw in the last hour plus a bunch of others immediately after the election. For some reason people have been acting like a twenty point gap among white Southerners is some kind of scary thing evocative of Jim Crow or something like that.

If a twenty point gap among white Southerners implies something like that, then does an eighty point gap between the candidates among blacks or a fifty percent gap among Hispanics mean that we're going to have a race war on our hands?

I don't think so.

This is all really, really stupid. But the Southern punching bag is a sort of security blanket for the rest of the country. It's much easier to make wild accusations about Southerners than tackle tougher questions about how to appeal to the center-right and right-wing portion of the electorate. You want a real civil rights fight? Talk about the voter suppression that's going on in the South and elsewhere. Don't fret over a 20 point gap. Southerners are more conservative. Big deal. That's a snoozer.

Just resubmitted it. The editor personally emailed me about it to say how much he enjoyed it, and also to make sure it was in in time to be published in the Spring. Nice not to have it sitting in limbo! I don't know why, but he said that it should go particularly well in that issue, which he thinks is a "strong one".

A pleasant experience all around, and a great history of science journal. This is the current issue for those that are interested.

1. Evan Roberts shares the North Atlantic Population Project at the University of Minnesota. It has historical census for the U.S., Canada, and several Northern European countries. This looks like a great resource. It's set up very much like the IPUMS for anyone familiar with getting data there.

They are getting along much better. I was worried Bartleby would scare the hell out of Jinx, but actually Jinx appears to be the alpha male. He takes and keeps the high ground and has no trouble keeping Bartleby in his place. They play and wrestle a lot and Jinx never seems scared by it, which is good.

The biggest problem is that Bartleby won't leave Jinx alone. He always wants to play and Jinx gets sick of it. Hopefully they'll reach an equilibrium over time.

Oh, and Jinx eats a lot. But that may just be nerves. He's also not as thorough at cleaning himself as Bartleby which is obnoxious, but that may just be nerves too. God I hope so.

Thus, I pronounce the kitty personalities reasonably compatible, and I am relieved.

Yes, the cat posts will probably die down too. Acclimating the two was just the weekend highlight, that's all.

Here and here, respectively. Maybe I'll have more comments on this in the coming weeks too.

I agree 100% with Krugman's post (unless or until Bob Murphy finds a sentence fragment where I'll have to concede that OK that was poorly worded... but what are the chances of THAT happening?).

Boettke has some decent points in the post if we think of this as a long-term deficit problem. The thing is, that's not what it is. He also has some decent points on constitutionalism. As you all know, I'm on board with that. But a short-run balanced budget constitutionalism would be a very bad constitution, and a long-run balanced budget (or we could say "sustainable debt level of deficit" instead of "balanced budget" - which is my preference), while perhaps a good idea, would have no teeth to constrain current policymakers unless they were at a crisis point. And at that point market forces would have plenty of teeth. So while I am whole-heartedly on board with constitutional constraints in most cases I am more dubious of how helpful that would be in the realm of deficits (short or long term).

The alarmism in Boettke's post is probably less called for in the case of Social Security than it is in Medicare. Of course there are smart reforms to make, but it doesn't pose the same problems. Medicare is ultimately a medical cost problem and a fee for service problem. Needless to say, simply cutting spendingis not going to solve either of those. That's not to say there aren't hard choices to make - they're just not especially fiscal choices.

The biggest worry right now is that dealing with the fiscal cliff (a short run problem) will err on the side of austerity which of course is not good for the budget or human welfare in the short or the long run (No Peter, we are not advocating trading off long run growth for short run relief. Can you please stop saying that?). The somewhat smaller but still substantial worry is that in an environment where good policymaking can't happen on the short run problems, it's VERY unlikely to happen on the long run problems.

Or maybe not. Maybe some admittedly awful short-run austerity will get everyone feeling so bipartisan that they throw in some long-term entitlement reform for good measure. I'm not holding my breath, but I guess that's possible and it will at least sweeten the pot a little. Ideally we'd have short-run loosening and long-run entitlement reform of the sort that Christie Romer has long been advocating.

They have a new article in the American Journal of Economics and Sociology on the subject. This one tracks the influence of Nobel winners that the authors slot in one of the two categories.

My critique of this whole line of argument is probably familiar to most of you by now. While the sociological distinction is a fair enough one to make, I think whenever Boettke gets into specifics it looks suspiciously like "the economists I like are mainline and the ones I don't like are mainstream". He is on particularly dubious ground when he kicks certain economists out of the Smith/Hume tradition. This is more based on past discussions (a good example is this post). I haven't read this new article, although I suspect it has some of the same problems. I'll download it when I'm on campus later today.

UPDATE: And in the same issue, Gene and Peter Leeson whip out Kuhn (if not literally... I haven't downloaded this one either... certainly in spirit)!

OK, I know it's lazy to just recycle facebook chatter, but I'm busy this week. On facebook, in response to this secession news, I wrote this on a post by Steve Horwitz:

"There's nothing inherently wrong with the idea of secession, but I think the U.S. would have to go damn near post-apocalyptic for it to be worth it for any state. Even those that would do alright on their own, like Texas or California, still couldn't possibly do better as a result.
I'm not the sort that thinks the Confederacy is always and everywhere equivalent to white supremacy, but one (among many) of the dumbest things about celebrating the Confederacy today is that you are celebrating one of the all time dumbest things that Southerners could have done to themselves. And the ridiculousness of celebrating the Confederacy isn't restricted to the fact that secession was shooting themselves in the foot: it's that they couldn't even shoot themselves in the foot successfully! A miserable failure at an attempt to shoot yourself in the foot - there's something to celebrate!
I prefer our other secession in the 1770s, when it was not a dumb move and we actually pulled it off."

Bob Murphy put it much more succintly this morning: "All I'm saying is, "succeed" and "secede" are distinct words."

He framed it as a grammar Nazi post, but I think it makes the point quite well!

Tuesday, November 13, 2012

We were discussing a Phillips Curve paper in macro last night that was sort of an institutionalist approach to the Phillips Curve (which makes sense - unemployment is related to the price level through wage bargaining and labor market institutions). He had two indexes he was looking at - an employment insecurity index and a social bargain index. One of the elements of the employment insecurity index was the change in the manufacturing employment differential between the Midwest and the South (the whole plant movement thing). That went positively into the index (interregional shifts increase employment insecurity).

What a weird way to think about things!

After all, that's an increase in employment security for the South! Sure the jobs could leave some day, but at the frequency he was looking at it, it is unambiguously an increase in employment security.

He tested the elements of the index separately too, and that one - not surprsingly since it's really ambiguous in its relationship to employment security - was insignificant.

Monday, November 12, 2012

You see this with teachers and nurses a lot too. A lot of people interpret this sort of thing as society not "properly valuing" these contributions. Since this is public employment, that might play some role. But when you look at things from a marginalist perspective, you quickly realize that if you think the problem is not nearly as easy as getting everyone to "properly value" public servants or any other class of worker.

Watching two cats get used to each other seems so familiar to me. There's all kinds of signalling and credible commitments. It's a repeated game where trust builds slowly but is lost quickly. And when they get really close and start acting friendly one of them puts together that he has a serious first-mover advantage.

Sunday, November 11, 2012

I say "sort of" because the difference between TARP and this program is that all the debts that OWS is buying up are going to be forgiven. But this is still quite extraordinary to me, because from the big bad corporations' perspective the Rolling Jubilee is exactly the same as TARP: an opportunity to offload toxic assets. In fact, since the guys at the other end of the table this time are not representatives of the most powerful government on the planet, I imagine there will be even less arm-twisting and *wink-wink* coercion than under TARP.

This is obviously great from a debt-deflation perspective and great from a humanitarian perspective. In fact the first thing I said to Evan (before saying "wow - OWS is basically supporting TARP") was "gee - the Fed and the Treasury should be doing this too". But I'm not so sure about that...

There's clearly moral hazard problems with debt forgiveness. Buying the debt first just exascerbates that. And if you were going to risk some moral hazard it seems like you should have done it in the middle of the financial crisis when it could have done some good (and when TARP did do some good). But that was four years ago (can you believe it's been that long?).

I also wonder a little about whose debt they forgiving. I assume they are targeting debt that is somehow in default, but I don't know.

What we need is demand. Debt overhang prevents that, but increasing demand can also prevent the debt from hanging over so much!

For all the trash talk about D.C., I think people would be surprised at how many libertarian or libertarianish people thrive in this area. It makes sense, of course. Where else are you going to pitch a blueprint for radical social engineering of public institutions that you just know will work wonders for the lives of the American people? D.C. is pretty much where you can make a living pushing social engineering schemes.

The other thing that's interesting about a lot of libertarians I meet (and that may be because I meet them around here) is that they're fascinated by politics, despite a lot of pretensions to the contrary. I think many get in the movement by getting hyped up about politics the same way a conservative or liberal would, and then deciding that conservatism or liberalism per se isn't quite for them.

It would be interesting to see a map showing the distribution of self-identified libertarians. Of course New Hampshire would be a hot spot, but I expect D.C. would loom pretty large as well.

I am working on my paper on household production over the business cycle (although seems weird to call this one a "cycle" since we're just kind of puttering along in the trough), reading Greenwood and Hercowitz's 1991 JPE paper "The Allocation of Capital and Time Over the Business Cycle", and I came across this interesting point (when they mention "household capital" they're refering to both residential investment and also consumer durables which are inputs to household production):

"Another problem with the perfect substitution assumption arises
when taxation of market activity is considered. Although both capital
stocks are subject to property taxes, only business capital is subject to
income taxation, which is far from being trivial (see Jorgenson and
Yun 1986). This creates a significant distortion favoring the accumulation
of household capital at the expense of business capital. This
feature of the tax system, which is incorporated in the current analysis,
is likely to be important for modeling the behavior of business
and household investment. In a model with perfect substitution between
the two capital stocks, business capital would be driven to zero."

This is paper - which talks a lot about household capital - is less important for me than another in the same issue by Benhabib, Rogerson, and Wright, which focuses more on home production and labor supply. But it was an interesting point.

All of these are RBC models. The RBC guys have definitely done the most work incorporating household production into macro.

This is a video of Richard Freeman speaking on "Innovative Measures of Innovation" from August. I don't really get into this stuff, although if one of my dissertation chapters is on new growth theory and I do anything empirical with it I may have to. As you might imagine, it's a tough thing to get at. Almost everyone knows that patents are pretty useless for this purpose. Bibliometric statistics (publication and citation) seem like a non-starter for the exact same reason as patents, but that is fairly popular right now.

Freeman's talk with Paula Stephan at the American Chemical Society, which I listened to online, went very well. They mentioned a recent National Research Council report on the science and engineering workforce employed by the Defense Department as an example of how views are changing on the "shortages" assumptions. That report used some graphics I put together on the relationship between computer science majors and IT wages and unemployment (no fancy analysis, but pretty clear descriptive statistics showing that students respond to wage signals).

Speaking of no-fancy-analysis-but-telling-descriptives, it looks like I won't have time to get the labor supply elasticity estimates into the petroleum engineering chapter. I have too much work to do to get it out in time and haven't touched it since the summer. That's alright, because we have lots of interviews with faculty and administrators from petroleum engineering departments and other good info in the chapter. That means that the labor supply models could go into another paper over the next couple years.

Saturday, November 10, 2012

So another way of making my point is that the task of generating signals for employers at a no-name college is pretty much comparable to the task at a top-tier university. You get brighter students because of the sorting function of admissions, but the task is really the same and anyone competent in the field can do the work of generating those signals for employers at any of those schools.

Given that point about the job of generating signals to hand to employers on a piece of paper called a transcript alone, you wouldn't expect to see a strong correlation between quality of professor and quality of undergrad. And yet we do see this correlation. That can't really be explained by the signalling theory but it's an important element of the world of higher education.

I think we all agree that signaling is an important part of the relationship between education and wages, and it's simply an important facet of human behavior to keep in mind. But some people think it's a lot more important than others and - much like voter irrationality in prior years - that share will increase significantly in the next couple years.

So maybe you guys can help me with something I was thinking about.

Some schools have tougher admission standards than others and if you can get in a tough school you try to because the reputation of that school is going to signal something good about you. Going through four years at a tough school shows that you can handle tough situations that are structured and perhaps that have a professional or white collar flavor to them.

But what I don't get is this: academic labor markets, or the market for professors, sorts in the same way. You have to have a PhD from an excellent school to get a job at an excellent school or a very good school. You have to have a PhD from a very good school to get a job at a very good school or a good school. If you get a PhD at a good school life will be harder for you than if you got a PhD at a very good school or an excellent school, and you should probably think of a variety of jobs aside from an academic job. (I am assuming here the traditional assumption that PhD programs are mostly about human capital investments and not signalling - although if you've ever tried to apply for a research grant without a PhD you know it's part signalling too).

This sorting makes sense on the students' end of things, but it doesn't make nearly as much sense (in an extreme sorting scenario) for the academic labor market end. You don't have to have an excellent academic pedigree to make undergrads work extremely hard. I'm not the most brilliant at math - not close. But I know more than enough to make life hell for undergraduates and separate the wheat from the chaff - which is what is allegedly done in the signalling model. A lot of economics departments don't even require that undergrad economics be taught with calculus. Simply making that leap is something anyone with a graduate degree from anywhere in the country could do in the curriculum. In other words, you don't need a top-tier PhD to perform the task of providing signals to employers about students. That's relatively easy. Even bad professors (who are usually bad because they're bad teachers and not because they don't know the material themselves) can rank student qualities pretty well (which is all the signalling model asks of them).

So what explains the high correlation between the toughness of a school for undergraduates and the caliber of the professors they hire? It makes no sense under the signalling model!

If you think of professors as doing two jobs - assigning students signals (i.e. - grades in a course) and research - you would actually expect the brilliant researchers to eschew schools that were known for rigorous assignment of signals. Teaching undergrads is a distraction from research. Let the professors with degrees from third or fourth tier universities challenge the undergrads at the really tough schools like Harvard or Princeton. Leave the professors with degrees from top tier schools to teach at the no-name college where they can get research done (or let them do it at independent research institutes with no signal-assignment obligation at all).

But this isn't what we see. We see the smartest professors teaching at the schools that are the toughest for undergraduates. We also see institutional arrangements that force them to teach and assign signals to undergraduates.

Why would this happen under a signalling model? Employers don't really need a top-tier PhD to separate the wheat from the chaff do they? It makes no sense with a signalling model.

It makes good sense if you think people go to a tough school to a large extent to get an excellent human capital investment. Signalling is obviously a part of the story, but you'd think the academic labor market would look very different if it were a big part of the story.

So what am I missing? How does the signalling model explain the fact that academic labor markets seem to sort in the same way that undergraduates do?